How Offshore Outsourcing Affects Customer Satisfaction

By

Jonathan Whitaker, M.S. Krishnan and Claes Fornell

Updated Sept. 13, 2008 11:21 p.m. ET

The outsourcing of customer service to offshore providers has gotten a lot of bad press in the U.S., with reports citing language problems and the exporting of jobs. But, despite the potential for such reports to alienate consumers, this offshoring continues to grow, driven mainly by the lower labor costs overseas.

Are companies that send customer service abroad making a mistake? It's hard to answer that question without knowing offshoring's actual impact on customer satisfaction.

For Further Reading

See these related articles from MIT Sloan Management Review.

Offshoring Without Guilt

By N. Venkat Venkatraman (Spring 2004) Offshoring is a critical component of next-generation business design, a dynamic process of continually identifying how to deliver superior value to customers and shareholders. http://sloanreview.mit.edu/smr/issue/2004/spring/03/

Proven Practices for Effectively Offshoring IT Work

By Joseph W. Rottman and Mary C. Lacity (Spring 2006) The authors use data derived from interviews with clients and suppliers to identify 15 emerging best practices in dealing with offshore suppliers of IT throughout each of the phases of development. http://sloanreview.mit.edu/smr/issue/2006/spring/11/

Our research indicates the effect in most cases is significantly negative -- but similar to the effect of outsourcing customer service domestically. That suggests companies shouldn't necessarily forgo the savings they can reap from offshoring. But if they're going to do it, they'd better do it right.

Negative Numbers

We analyzed the offshoring and outsourcing activities of 150 North American companies and business units from 1998 to 2006. As a group, those that outsourced customer service saw a drop in their score on the American Consumer Satisfaction Index, or ACSI, a measure created by the National Quality Research Center at the University of Michigan. The declines were roughly the same whether companies outsourced customer service domestically or overseas.

ACSI scores tend to move in the same direction as companies' share prices. Based on the historical data showing that connection, the average ACSI decline we found at companies outsourcing customer service is associated with a drop of roughly 1% to 5% in a company's market capitalization, depending on what industry the company is in.

That's a steep price to pay. But there are ways to make outsourced customer service more palatable to customers or to mitigate its negative effects, and in some respects that may be easier to do with offshoring. And there are offshoring alternatives that can save a company money without damaging its relationship with its customers.

Survey of Outsourcing

A new trend in outsourcing is to set up shop in the U.S., as more companies look to "nearshore," rather than offshore opportunities.

An important step companies can take to improve the quality of outsourced customer service is to ensure that the provider has all the information necessary to help the customer and full authority to do so. Sometimes, because a company wants to protect information about its customers, the customer-service provider isn't given complete customer histories and profiles. Or the provider's authority to resolve complaints is limited; for instance, the provider may not be permitted to grant credits to customers. Companies need to weigh their concerns about information security and financial control against the damage that such arrangements can do to customer satisfaction.

Tapping Technology

Companies can also make customer service more effective by taking advantage of the technological innovations that some providers offer, and here there may sometimes be an advantage in offshoring. That's because some foreign outsourcing providers have offerings their domestic counterparts can't match in terms of technologies that help guide customer service by recognizing patterns in consumer behavior.

One way to mitigate the damage from outsourcing customer service is to invest the money the company saves to improve the quality of the company's products or services, or to cut prices, rather than simply pocket the savings as extra profit. Our findings suggest that this isn't happening in most cases. Among the companies we studied that had outsourced customer service, there was no increase in the perceived-value component of their overall customer-satisfaction score: Their customers didn't feel that they were getting any more for their money than they did before the company started outsourcing.

Here again there may be an advantage in offshoring. If a company can save more by sending customer service overseas, it will have more opportunity to devote at least some of that money to upgrading its business.

In addition to considering whether or not to offshore customer service, companies should consider whether back-office functions such as information technology may be suitable for offshoring. Our study found that back-office offshoring had no effect on overall customer satisfaction. So the savings a company garners this way aren't offset by dissatisfaction among customers.

—Dr. Whitaker is an assistant professor of management at the University of Richmond's Robins School of Business in Richmond, Va. Dr. Krishnan is a Hallman fellow and professor of business information technology at the University of Michigan's Ross School of Business. Dr. Fornell is the Donald C. Cook professor of business administration, a professor of marketing, and the director of the National Quality Research Center at the Ross School of Business.

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